Slumping oil income could slash spending in independent Scotland

A leaked Scottish Government memo has warned of potential public spending cuts in an independent Scotland due to the high volatility in tax revenues from the oil industry.

The paper stated that the ‘relative importance’ of oil revenues in the finances of Scotland meant recent downward revisions for tax income led to a ‘deterioration in the outlook for Scotland’s public finances’. At last year’s Budget, the Office for Budget Responsibility said revenue from the North Sea between 2011/12 and 2015/16 would be £44.1bn, down £17.2bn from the prediction a year earlier.

This would more than double Scotland’s forecast cumulative net deficit to £28bn between 2011/12 and 2015/16, according to the leaked memo, prepared by Finance Secretary John Swinney.

It added this would have ‘important implications for budget setting and estimating public sector borrowing’.

Steps should be taken to reduce the dependence on oil to support government expenditure, including building up a dedicated oil fund, the report said. But, ‘on present assumptions about on-shore tax revenues’, this would require ‘some downward revision in current spending’. The memo added: ‘We will need to be mindful that these pressures could reduce the resources available to provide additional public services.’

The paper also revealed that ministers had established a working group as part of the government’s Council of Economic Advisers to develop ‘the monetary and fiscal architecture for Scotland post-independence’. The group, which includes the Nobel Prize winning economist Joseph Stiglitz, will develop proposals to establish a ‘sterling zone’ as part of plans for Scotland to retain the pound after independence.

Swinney added the working group would have to ‘consider the affordability of state pensions’ in its work on fiscal sustainability. ‘Our fiscal rules also need to take into account the issue of how Scotland funds counter-cyclical expenditure with welfare – specifically payments to those who become unemployed – being the biggest component of this.’

Anti-independence campaign group Better Together said that the leaked memo revealed that ministers were aware of the increased volatility of income from oil, which would create risks around welfare spending.

Better Together chair Alistair Darling said the document was a ‘hammer blow’ to the economic credibility of independence and the Scottish National Party, with the independence referendum planned for autumn of 2014.

‘In public they tell us that oil will pay for everything, but in private they know that it won’t. Be it on pensions, public sector jobs or benefits, the nationalists have been caught saying one thing, but planning another.’

A Scottish Government spokesman said the paper was about 12 months old. He added: ‘As this paper makes clear, Scotland has nothing to fear and everything to gain in grasping the opportunities of independence. It also shows the depth of detailed work the Scottish Government is undertaking on financial planning.’